Wednesday, July 20, 2011

FOREX Euro climbs on Greece hope

FOREX-Euro climbs on Greece hope; contagion fears linger
* Euro rises vs dollar, but uncertainty caps gains

* Investors hopeful of deal on Greece at euro-zone summit

* Dollar falls vs basket despite progress on US debt talks (Updates prices, adds comments, byline)

By Wanfeng Zhou

NEW YORK, July 20 (Reuters) - The euro rose against the dollar on Wednesday on hopes euro-zone leaders would reach a deal to ease Greece's debt burden, though concerns about contagion to other European economies should keep the single currency vulnerable.

French ministers said European leaders were less divided than the media was reporting and were likely to reach an accord at Thursday's summit to help Greece avert a potential default that could roil financial markets. [ID:nLDE76J0CA]

Analysts cautioned, however, that fears remained Greece's crisis will spread to bigger economies in the region such as Italy and Spain. Yields on the two countries' bonds jumped above 6 percent earlier this week before easing back.

"We expect a new framework for Greece to be agreed, involving the first real efforts to reduce Greece's debt burden. But we expect little concrete in terms of measures to reduce contagion more broadly," said Jens Nordvig, global head of G10 FX strategy at Nomura in New York.

"Hence, bond markets in Spain and Italy will largely remain 'on their own' in coming weeks. We continue to trade the euro from the short side in the current environment."

The euro EUR=EBS was last up 0.4 percent at $1.4217. Initial resistance is seen around $1.4282, the euro's high on July 14, according to Commerzbank technical analyst Karen Jones. Support lies around $1.3915, the 200-day moving average.

Euro-zone sources said a summit of euro-zone leaders would be delayed slightly to allow time for a deal to be reached on private-sector involvement in shouldering the costs of a Greek debt resolution. [ID:nB5E7IB01F]

While an agreement on Greece would be welcomed by investors, the success of the summit would be better judged by the performance of Italian and Spanish bonds, analysts said.

Spain will auction 10- and 15-year bonds on Thursday ahead of the EU leaders' meeting. Investors will closely watch the costs of funding to gauge the stress level on peripheral debt markets.


Signs of progress on a U.S. budget deal also prompted a rise in risk tolerance. A group of Democratic and Republican senators, dubbed the "Gang of Six," presented a new plan late on Tuesday that could revive stalled U.S. debt talks and avert a default by the world's biggest economy. [ID:nN1E76H1Y0]

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, in a note said a striking feature of the more favorable news on U.S. fiscal development was how short-lived the U.S. dollar gains were.

"It is worth considering, whether the U.S. dollar can benefit from the budget," he said. Negative debt ceiling news is a clear dollar negative, but while positive news on U.S. debt discussions is good for the dollar, it's also likely to boost risk appetite, which would largely negate any positive dollar reaction, he said.

The dollar fell 0.4 percent to 78.76 yen JPY=EBS, while against a basket of major currencies, the dollar index slipped 0.5 percent to 74.828 .DXY.

Brian Dolan, chief strategist at Forex in Bedminster, New Jersey, said the dollar's only real chance at a rally would probably come if the EU meeting fails to ease euro-zone debt fears and the euro sells off. Copyright @ 2011 - Theme by NanLimo - Thanks to Google